Encouraging innovation in financial services has been a key policy initiative of the Federal Government in recent times. In its May budget, the Treasurer announced a plan to create a technologically driven and innovation-based economy.
The Australian corporate and conduct regulator, ASIC, has driven this commitment to innovation. In April 2015, it established its ‘Innovation Hub’ to assist FinTech start-ups to navigate the regulatory framework. The measures included:
- engagement with other FinTech industry initiatives;
- informal assistance and guidance to eligible start-ups;
- a dedicated website;
- specialised internal working teams for new business models; and
- establishment of the Digital Finance Advisory Committee, which includes public and private industry stakeholders.
Yesterday, ASIC released a Consultation Paper calling for industry and public comment in relation to further measures it proposes to take to facilitate innovation in financial services, including the proposal of a regulatory sandbox licensing exemption.
One of the most common issues facing FinTech start-ups is the requirement to obtain an Australian Financial Services Licence (AFSL) in order to enter the market for their new product or service. This requirement can become onerous for start-up companies who may not have the resources, experience or time required to undertake the process.
Currently, there is some flexibility within the financial services framework. This includes modular licencing, whereby start-ups can apply for a limited AFSL by reference to service, client and product, for example, by dealing with wholesale clients only. ASIC also has a discretion in relation to organisational competence and will allow a prospective licensee to provide submissions about why a responsible manager has appropriate knowledge and skills. Start-up companies also have the ability to act under someone else’s AFSL. ASIC also has the power to exempt persons or products from most of the laws it is empowered to administer, on a case-by-case basis as well issuing no action letters.
Despite these measures, ASIC has identified three interconnected issues for FinTech start-ups including; speed to market, organisational competence and access to capital, all of which may justify the consideration of additional measures.
What are the proposed measures?
ASIC is considering the following options:
- Additional Guidance – providing additional guidance about how ASIC assesses whether a responsible manager has the appropriate knowledge and skills under Option 5 of Regulatory Guidance 105 ‘Licencing: Organisational Competence’ (RG 105).
- Third-party signoff – modifying guidance under RG 105 to allow heavily automated (but small-scale) businesses to rely, in part, on sign-off from an appropriately experienced third party in order to meet their organisational competence obligation.
- Six month regulatory sandbox exemption – providing a conditional, industry-wide exemption to allow new Australian businesses to test certain financial services for six months without holding an AFSL.
The fourth, and preferred option for ASIC, is a combination of options 1 – 3. The fifth option would be to maintain the status quo. According to ASIC the balance sought to be struck with the options above is to satisfy the fundamental principles of regulation and licencing in alternative ways.
It is likely that the proposed introduction of a ‘regulatory sandbox’ licencing exemption would be the most attractive measure for the FinTech space. According to ASIC, this will operate as an industry wide licencing waiver for limited financial services provided to a small number of retail clients. The elements of the proposed licencing exemption are:
- the testing business would need to notify ASIC that it intends to rely on the AFSL exemption from a specified date;
- the waiver would apply to advice and dealing services only for a period of 6 moths;
- the testing business must be sponsored by an organisation recognised by ASIC (“sandbox sponsor”);
- the service is limited to up to 100 retail clients;
- the waiver would allow up to $10,000 investment per retail client in listed securities, deposits and simple managed investment schemes;
- the service may have an unlimited number of wholesale clients, subject to a total investment cap of $5 million;
- the testing business must comply with a modified set of conduct and disclosure obligations;
- the testing business must be a member of an external dispute resolution scheme;
- the testing business must have adequate compensation arrangements;
- the testing business must not be an existing licensee;
- ASIC has the power to withdraw the AFSL exemption; and
- the testing business must give a short report to ASIC about the test following completion of the testing period.
According to ASIC, the sandbox sponsors would be not-for-profit industry associations or other Government recognised entities. ASIC expects sandbox sponsors to only sponsor a FinTech business if that business is operated by fit and proper persons and they have conducted a preliminary assessment that the proposed business model is reasonably sound and does not present significant risks of consumer detriment.
These proposals align with other developments internationally. In the UK, the Financial Conduct Authority’s ‘Project Initiative’ is trialling its version of a regulatory sandbox, called ‘safe space’ which is available on application. Similarly, the Monitory Authority of Singapore has announced that it will introduce a ‘regulatory sandbox’ to give financial institutions more confidence to experiment with and launch their innovative products or services within controlled boundaries.
What feedback is being sought?
ASIC is seeking feedback on the proposals developed to facilitate innovation while maintaining appropriate customer protections. Specifically, ASIC is interested in knowing:
- Whether it is agreed that there should be additional measures in place to facilitate innovation, or whether the status quo should be maintained?
- What benefits do stakeholders consider will result from the proposed approach?
- What disadvantages do stakeholders consider will result from the proposed approach?
- Are there any other options ASIC should consider to meet their regulatory objective of further facilitating innovation, while ensuring that appropriate protections apply to all financial consumers?
What is the timeline and when are the changes likely to be implemented?
ASIC intends to move forward with and put into place its preferred combination of Options 1 to 3 before the end of 2016.
Comments are due on the consultation paper by 22 July. Draft regulatory guidance and/or licencing exemption will be released by September and finalised by the end of 2016.
We have been tracking developments in the financial services innovation space in Australia and globally over the last four years but we are now seeing stronger and more concerted efforts by regulators to facilitate innovation across the globe, which is encouraging for all stakeholders.
If you are interested in more information about this topic, please contact Zein El Hassan.